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Fortinet's Earnings Rocket Higher

By Timothy Green - May 4, 2018 at 8:20PM

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Double-digit revenue growth helped push the bottom line to new heights.

Cybersecurity company Fortinet (FTNT 1.40%) announced its first-quarter results after the market closed on May 3. The report featured double-digit revenue expansion and explosive earnings growth, and the company expects its third-generation network security products to drive continued growth for the next few years. Here's what investors need to know about Fortinet's first-quarter results.

Fortinet results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year

Revenue

$399.0

$340.6

17.1%

Net income

$41.6 million

$10.7 million

288.8%

Non-GAAP earnings per share

$0.33

$0.17

94.1%

Data source: Fortinet.

What happened with Fortinet this quarter?

  • Product revenue grew 6% year over year to $142.8 million. Service revenue was $256.2 million, up 25% year over year.
  • Total billings increased 15% from the prior-year period to $463.2 million.
  • Total deferred revenue was $1.4 billion, up from $1.1 billion at the end of the prior-year period, and up from $1.34 billion at the end of the fourth quarter of 2017.
  • Fortinet produced $139.7 million of operating cash flow and $128.1 million of free cash flow during the quarter. Free cash flow grew from $116.2 million in the first quarter of 2017.
  • The company had cash, cash equivalents, and investments of $1.39 billion at the end of the quarter, up from $1.35 billion at the end of 2017.
  • Fortinet spent $115.5 million buying back 2.5 million of its own shares during the first quarter.
  • Interim CFO Keith Jensen was named CFO by the board of directors.

Fortinet provided the following guidance for the second quarter and the full year:

  • Second-quarter revenue is expected between $420 million and $430 million, along with billings between $485 million and $495 million, and non-GAAP EPS between $0.34 and $0.36. The company produced revenue of $363.5 million and non-GAAP EPS of $0.27 during the second quarter of 2017.
  • Full-year revenue is expected between $1.715 billion and $1.735 billion, along with billings between $2.040 billion and $2.065 billion, and non-GAAP EPS between $1.51 and $1.55. The company produced revenue of $1.49 billion and non-GAAP EPS of $1.04 during 2017.
  • The adoption of the ASC 606 revenue recognition standard will provide a non-GAAP EPS benefit of $0.05 for the second quarter and $0.19 for the full year. Those benefits are included in the company's guidance.
Fortinet hardware.

Image source: Fortinet.

What management had to say

During the earnings call, Fortinet CEO Ken Xie gave an update on its third-generation network security products:

As of Q1, the Security Fabric is fully available within AWS environments. During the quarter, we announced 11 new Fabric-Ready partners, including Arista, IBM, McAfee, ServiceNow, and VMware. To date, Fortinet has 43 Fabric-Ready partners which further expands our Security Fabric across the hybrid cloud.

Xie expects the Security Fabric to drive growth and market share gains for the next few years, pushing the company toward its long-term goal of hitting a 25% non-GAAP operating margin by 2022.

Fortinet CFO Keith Jensen provided some details on cloud-related billings:

Regarding cloud billings, while the billings are relatively small versus the rest of the business, we experienced triple-digit growth in both on-demand cloud consumption and bring-your-own-license. Across our cloud partners, AWS continues to be the leader with contributions coming from Azure. Oracle, Google, and IBM each came online with initial billings during the first quarter.

Looking forward

Fortinet's revenue growth accelerated a bit from the fourth quarter, and its bottom line exploded on both a GAAP and non-GAAP basis. The company is seeing extremely strong growth in its cloud-related business, but that remains a small portion of the overall business so far.

Demand for cybersecurity products and services is unlikely to let up anytime soon, giving Fortinet a long growth runway that likely extends many years into the future.

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